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To improve our understanding of the divergent evolutions that recently emerged between European countries in terms of labour productivity, this working paper compares the labour productivity growth of three small open European countries: Austria, Belgium and the Netherlands. The analysis focuses on market services as they are the most important single factor that is responsible for the divergences.
The launch of the Lisbon strategy in 2000 was strongly motivated by the observation of a declining trend in European labour productivity growth over the past decade. As US productivity growth accelerated after 1995, this divergent evolution indicates that after a process of catching up to the US productivity level that started after the World War II, European productivity levels ceased to converge to the US level after 1995. The widening gap in productivity performance was first attributed to a differential in the productivity growth of ICT producer industries and later to divergences in productivity growth of ICT user industries and particularly to ICT user market services.
However, this average European evolution is not necessary relevant to all European countries considered individually. The second half of the nineties was also a period of increasing divergence of productivity growth patterns inside the European Union. The productivity performances of Scandinavian countries are, for example, in line with American ones but far from the Spanish or Italian evolution.
This paper compares the evolution of three small open European countries in terms of labour productivity growth by using the March 2007 release of the EUKLEMS database, which is the first data set to present homogeneous variables on growth and productivity for European countries and the US. This EUKLEMS database offers the main advantage of providing a better measure of capital input by calculating capital services rather than capital stocks.
The comparison shows that while Austria and Belgium recorded a decrease in their productivity growth between 1995 and 2004, the Netherlands followed the American pattern and recorded an increase in its growth rate from 1995. The decomposition of labour productivity growth makes it possible to underline the important role played by total factor productivity (TFP) in the Dutch upsurge in productivity growth. The breakdown of the data by industry shows the importance of the Distribution sector in the Dutch performance. The growth of TFP observed in the Distribution sector is then linked to different potential determinants: ICT accumulation and use, labour qualifications, R&D and innovation and regulations. In summary, the comparison between the three countries provides the insights that the Dutch performance is better in terms of labour force qualification, R&D efforts at the beginning of the period, and regulatory environment.